Lihir Gold: A Stellar Options Trade

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 |  Includes: ACL, AMZN, ASIA, AXU, BIOF, BPZ, CAGC, CGR, CHSI, CPRT, CRIS, DGWIY, DIA, DWA, ECPG, GIII, GLD, GOOG, IOC, IWA, IWM, JOSB, KERX, KMG, KOF, LIHR, LIWA, MELI, NAK, NG, NILE, NTRI, PFCB, POM, PVH, QQQ, SIRO, SPY, TLT, TNS, TSTC, UAUA, ULTA, WCRX, WDC, XLB, XLE, XLI, XLK, XLU
by: Option Maestro

With the major indices trading mixed Wednesday, there were many stocks which traded higher on BIG volume. The list described below is a large one which is quite unusual for a rather flat trading day. As always, the first thing I do is scan the list for familiar names, such as stocks which have appeared on similar scans multiple times in the past week or two (most of these names are unfamiliar so it saves a lot of time, especially with larger lists). This indicates there may be some real momentum behind the stock, and that it could trade higher in following sessions as well. Then (if and when any of the stocks I find are familiar to me), I take a look at the chart(s) to see if I can structure a potential option trade. In this post I will name 39 stocks, but only write about one in detail and outline an option trade I may look at opening in the near future.

This method is just one of the ways I use to find stocks for potential option trades. The first part of this post will show the list of stocks which traded higher on above average volume. The second part of this post requires the knowledge of stock options. To learn more about the option strategies outlined in this post, risks, pricing, calculations, other strategies, and options in general, click here.

The table below shows the company, ticker, per share % increase, and volume increase (% increased compared to 50 day average). For your convenience I have ranked the stocks in order from greatest to least volume % change.

Company Ticker Price Change Volume Change
Lihua International, Inc. (NASDAQ:LIWA) 33.54% 869.35%
BioFuel Energy Corp. (NASDAQ:BIOF) 34.21% 786.94%
China Agritech Inc. (OTCPK:CAGC) 17.63% 778.49%
Alcon, Inc. (NYSE:ACL) 5.57% 630.53%
Alexco Resource Corp. (NYSEMKT:AXU) 16.92% 551.51%
China Marine Food Group (OTCPK:CMFO) 7.36% 458.91%
Claude Resources Inc. (NYSEMKT:CGR) 20.91% 457.78%
Keryx Biopharmaceuticals (NASDAQ:KERX) 13.96% 451.29%
Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) 9.97% 416.82%
Curis, Inc. (NASDAQ:CRIS) 12.78% 372.10%
Telestone Technologies Corporation (NASDAQ:TSTC) 10.39% 354.05%
G-III Apparel Group, Ltd. (NASDAQ:GIII) 5.89% 341.59%
DreamWorks Animation SKG, Inc. (NASDAQ:DWA) 9.71% 328.31%
KMG Chemicals, Inc. (KMGB) 3.44% 274.66%
P.F. Chang's China Bistro (NASDAQ:PFCB) 9.27% 256.17%
Sirona Dental Systems, Inc. (NASDAQ:SIRO) 5.97% 248.89%
Duoyuan Global Water Inc (DGW) 4.10% 192.68%
BPZ Resources, Inc. (NYSE:BPZ) 9.14% 158.69%
NovaGold Resources Inc. (NYSEMKT:NG) 8.88% 142.56%
Copart, Inc. (NASDAQ:CPRT) 8.79% 119.30%
UAL Corporation (UAUA) 12.47% 98.14%
Encore Capital Group, Inc. (NASDAQ:ECPG) 4.06% 94.38%
Pepco Holdings, Inc. (NYSE:POM) 1.07% 82.74%
Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) 4.12% 65.64%
MercadoLibre, Inc. (NASDAQ:MELI) 4.45% 65.37%
Jos. A. Bank Clothiers, Inc. (NASDAQ:JOSB) 2.62% 64.42%
TNS, Inc. (NYSE:TNS) 5.38% 57.85%
Iowa Telecom Services (IWA) 2.05% 52.41%
The Warnaco Group, Inc. (WRC) 2.38% 51.94%
Warner Chilcott Plc (NASDAQ:WCRX) 1.96% 48.27%
AsiaInfo Holdings, Inc. (NASDAQ:ASIA) 6.21% 44.80%
Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) 1.15% 43.30%
Interoil Corp (NYSE:IOC) 3.34% 37.93%
NutriSystem Inc. (NASDAQ:NTRI) 1.14% 37.58%
Blue Nile, Inc. (NASDAQ:NILE) 1.94% 36.49%
Lihir Gold Limited (LIHR) 1.88% 30.04%
SanDisk Corporation (SNDK) 3.50% 23.79%
Catalyst Health Sltns (NASDAQ:CHSI) 2.36% 21.62%
Amazon.com, Inc. (NASDAQ:AMZN) 2.71% 21.44%
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UPDATE: First I will take a minute to write an update about three stocks outlined in previous blog posts that appeared in the list above. Yesterday I closed my earnings option trade on SIRO (Check out trade idea here) which was just opened Tuesday. I also closed many of my short vertical put spreads on ASIA (Check out trade idea here), but kept the 30 strike calls as I will be looking to sell some of them on continued strength in the underlying. I was also out taking more profits in my MELI vertical call spread position (Check out trade idea here). I took profits today to realize a profit even if MELI expires worthless, but I strongly believe we could see MELI above 55 by expiration. Therefore I plan on keeping the remainder of my December 50/55 vertical call spread position on the table as I believe this strategy could achieve maximum profitability.

One stock from the list above I recognized from a previous breakout list is Lihir Gold Limited (LIHR). This stock first appeared after hitting similar levels in my blog post from November 24. Before getting into the chart details, I will give a company profile from Google (NASDAQ:GOOG) Finance below.

Lihir Gold Limited (LGL) is engaged in gold mining and processing operations on Lihir Island in Papua New Guinea, at Ballarat in Victoria, Australia, at Mount Rawdon in Queensland, Australia and Bonikro in Cote d’Ivoire, West Africa. It is also engaged in exploring in Côte d’Ivoire, where it has over 20,000 square kilometers of exploration licenses either granted or under application in the Birimian greenstone belts. The Ballarat operation comprises four granted mining licenses, aggregating to an area of 22.1 kilometer, and a single granted exploration license comprising a semi-contiguous area of 126 kilometer all granted in the state of Victoria, Australia. All tenements are held 100% by Ballarat Goldfields. The Mount Rawdon operation comprises 12 mining licenses covering 39.6 kilometer. It maintains six exploration permits for minerals (EPMs) surrounding the Mount Rawdon mine site. The Bonikro operation is located on an exploitation permit granted by the government of Cote d’Ivoire.

It is clear there has been some momentum behind this stock lately, but by glancing at the chart there seems to be some resistance near 35 a share. It traded near 35 a share on November 24 and 25, before selling off severely with the rest of the market on what I call Red Friday (Black Friday). I need to see this stock trade and close above 35 a share before I would become a buyer. I am very bullish on the entire precious metal sector right now as I believe gold will continue to trade higher until the fed at least hints at a rate hike. Note that many of the stocks listed above will be good plays and many will be bad plays, I list them all to show possible breakout stocks and write about a few of the ones I am interested in trading.

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Lihir Gold Limited Option Trade: As stated I would like to see this stock break above 35 a share on above average volume. The stock traded to a new 52 week high of 35.06 Wednesday before settling slightly lower. If it breaks above and holds I would look at opening Vertical Call Spreads. This is a very easy trade to open and only requires the use of two separate option contracts. As the stock trades higher the call spread will become a bit more expensive but give a higher probability of becoming profitable. For an example I'll use December options and current market data. I would open this trade a bit differently than other vertical call spreads blogged about in the past. I would simply purchase December 35 strike call contracts and sell the December 40 strike call options against them (1 for 1); however I would purchase the 35 strike calls and wait for continued strength in the underlying before I write the 40 strike calls out (this way the 40 strike calls bring larger premiums). This is because currently the December 40 calls wouldn't make a big difference in the cost of the spread. However if the stock continues higher after the 35 strike calls are purchased, writing the 40 calls could lower the cost significantly, or depending on the time until expiration I may just close the 35 strike calls for a profit. I believe if and when this stock can close above 35 a share it is a bullish sign and there will be continued strength. The December 35 strike calls can currently be purchased for $130 per option contract, making a spread would lower the cost to $120.

Profit & Loss: The maximum loss per spread is the price paid or $120, even if the stock trades to zero. If the stock continues higher and come December options expiration shares of LIHR are at or above 40, this strategy will return maximum profitability of $380 per spread or 317%. The break even point for this strategy would be shares of LIHR at 36.20 at December options expiration.

This is a bullish strategy and should not be considered if you think the stock will sell off in the near future. However if you feel the stock could move higher in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

Disclosure: Long December ASIA 22.50 Puts, December ASIA 30 Calls, Short December ASIA 25 Puts, December MELI 55 Calls